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Do Hedge Fund Managers Misreport Returns? Evidence from the Pooled Distribution

55 Pages Posted: 2 Oct 2007 Last revised: 13 May 2014

Veronika Krepely Pool

Indiana University - Kelley School of Business - Department of Finance

Nicolas P. B. Bollen

Vanderbilt University - Finance

Date Written: November 19, 2007

Abstract

We find a significant discontinuity in the pooled distribution of reported hedge fund returns: the number of small gains far exceeds the number of small losses. The discontinuity is present in live funds, defunct funds, and funds of all ages, suggesting that it is not caused by database biases. The discontinuity is absent in the three months culminating in an audit, funds that invest in liquid assets, and hedge fund risk factors, suggesting that it is generated neither by the skill of managers to avoid losses nor by nonlinearities in hedge fund asset returns. A remaining explanation is that hedge fund managers avoid reporting losses to attract and retain investors.

Keywords: hedge funds, return management

Suggested Citation

Pool, Veronika Krepely and Bollen, Nicolas P. B., Do Hedge Fund Managers Misreport Returns? Evidence from the Pooled Distribution (November 19, 2007). Available at SSRN: https://ssrn.com/abstract=1018663 or http://dx.doi.org/10.2139/ssrn.1018663

Veronika Krepely Pool (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

Nicolas P.B. Bollen

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

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